Non-Manufacturing Activity Slows In September - October 3, 2013

Growth in the services area cooled last month, thus running counter to the improving performance by the companion manufacturing sector. This latter report, which was issued on Tuesday, indicated that the industrial sector had shown further progress during the month of September.

Here, though, the services, or non-manufacturing, sector, came in with a reading of 54.4. Now, although that was above the dividing line between an expanding services arena (above 50.0) and activity that is contracting, the improvement fell short of the 58.6 result of the prior month, as well as consensus expectations for this past month of 57.4.

This report, like the aforementioned one on manufacturing, is issued by the Institute for Supply Management, an Arizona-based trade group. Breaking the services report down to its component parts, we see that new orders slowed from 60.5 in August to 59.6 last month, while business activity declined from 62.2 to 55.1. Also, employment, which had hit a six-month high of 57.0 in August, retreated to 52.7 in September.

The report may raise concerns some about growth in the final quarter of this year, especially as it comes on the heels of Tuesday's partial government shutdown, which shows no signs of ending anytime soon, especially in light of last night's unproductive talks between the White House and Congressional leaders on the Republican side.

Meanwhile, the 54.4 September survey result was among the weaker of the past year, with scores of 52.8 to 53.7 having been tallied from April to June of this year. In contrast, August's 58.6 score was a 12-month high. For the past year in the aggregate, the average monthly score was 55.0. Thus, we are just slightly below that level at this time.

Looking at the report in its entirety, we find month-to-month improvement only in prices and new export orders. We would normally be more concerned by this disappointing performance, but it still seems to be an outlier, as most other data issuances of late, notably the manufacturing report and the surveys on housing, suggest that the tone of the economy is still firming. However, the government shutdown is a worry, especially if it goes much longer, or, worse, if the next step in the contentious nation's Capitol would be a failure to raise the debt ceiling, an unwanted outcome that would force a default in our country for the first time ever.

But that is getting a bit ahead of ourselves. For now, this report, albeit disappointing, is not, in and of itself, a game changer, and we still look for the economy to press forward in the current quarter by 2.0%-2.5%, a reasonable, if not compelling, prospect.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.